Amazon Phone rumors reach a boiling point

Some experts suggest the e-retailing giant will not launch a smartphone until it's confident with its foray into tablets with the Kindle Fire (pictured above).

New reports say Amazon.com Inc. is making not one but two smartphones, one with a 3-D screen, along with a separate audio-streaming device. This comes after last month’s reports that Amazon is building a set-top box for streaming movies and TV shows. If these reports, based on anonymous sources, are true, it looks like Amazon is setting itself up for a head-to-head battle with Apple Inc., maker of the roost-ruling iPhone and iPad. If Amazon adds smartphones and a set-top box, both Amazon and Apple will then have smartphones, tablets and set-top boxes.

The key to this battle is digital content. Mobile experts like to call what Apple and Amazon have a mobile ecosystem: digital content and the hardware on which content is consumed. Apple has demonstrated that when consumers buy a company’s hardware—such as the iPod—they are likely to buy the digital content from that company’s online store, in this case iTunes. Amazon replicated that model when it introduced the Kindle and then began selling lots of electronic books for Kindle owners to read on their devices.

Now the battleground has become streaming movies and TV shows over the Internet, and all the major players want consumers to be using their hardware, experts say. “The Kindle’s combination of device and content jumpstarted the e-book market, and Amazon wants to ensure that it has a distribution channel where its content is always in front of the consumer,” says Avi Greengart, research director, consumer devices, at mobile device and telecommunications research firm Current Analysis Inc. “For that kind of control, Amazon feels it needs to be in the hardware business.”

Smartphones, a set-top box and a streaming audio player would all be moves to increase sales of Amazon’s digital content, says Eric Best, CEO of Mercent Corp., which, among other things, helps retailers sell on marketplaces like Amazon’s.

“An Amazon smartphone would be a hybrid type of device that functions as a phone, enables retail transactions, and provides capabilities for listening to music and viewing Kindle content and some lightweight video,” Best says.

A move into smartphones would also be about control. Yes, Amazon has apps for every major smartphone platform, but it could have a more influential mobile presence if it owned the phone.

“Amazon’s motivation is clearly to secure greater loyalty and engagement with its customers, no matter where they are—despite their success with the various Kindles, those devices don’t generate nearly the level of activity and focus during the course of a customer’s day that a smartphone does,” says Charles Golvin, a principal analyst at Forrester Research Inc. who follows mobile and telecommunications technologies. “While Amazon’s Kindle and other apps allow its customers to engage with the company across devices from Apple and other competitors, the level of engagement achieved by an app falls far short of that achieved by controlling the entire device experience.”

But some experts don’t believe Amazon will make a move into the smartphone market until it’s completely confident about the future of its tablet venture, the Kindle Fire.

“Amazon is unlikely to move into the smartphone market until it is satisfied with the performance of the Kindle Fire and it has fully learned the lessons from its latest foray into the hardware market,” says Scott Bicheno, senior analyst, wireless smartphone strategies, at technology research and consulting firm Strategy Analytics Inc. “The smartphone market is more mature and has many more competitive players than the tablet market. Furthermore, the lower price tiers are especially competitive right now, which makes it unlikely that pricing strategy alone will be sufficient to bring success to any potential Amazon phone. For these reasons, reports of Amazon exploring other potential differentiators, such as 3-D displays, are unsurprising.”

Amazon may want to take note of a recent development at Facebook. Earlier this week, AT&T slashed the price for the HTC First, billed as the first “Facebook phone,” from $99.99 to just 99 cents after less than a month on the market. Ouch. Facebook was long rumoured to be working on its own phone, but then a few weeks ago came out with the Facebook Home app, which lets a consumer transform the look and feel of an Android device with Facebook features and functions. The AT&T price cut suggests consumers have not shown much interest.

But Facebook and Amazon are two very different cases.

“Amazon and Facebook have entirely different business models,” Golvin says. “Amazon’s content and commerce model allows it to underwrite the cost of hardware—and, potentially, connectivity—in order to secure that greater loyalty, whereas Facebook’s ad model does not.”

But all of this could turn out to be much ado about nothing. The anonymous sources behind the latest reports say Amazon could shelve the new devices. It strikes me that with the success of the Kindle Fire tablets, Amazon could very well be working on smartphones. It sees what Apple has done with a consumer’s day, allowing her to move seamlessly back and forth between tablet and smartphone, using the device best suited for the moment, consuming boatloads of apps, e-books, and digital music and movies. Amazon could do the same. We shall see.